Reference no: EM133016150

Question - Deluxe Carpets Ltd is a leading carpet design and manufacturing firm. The company has just developed a new carpet design named FeatherTouch. Since it is a new product, the company found it difficult to predict the sales demand. However, based on their experience in previous product launches, the company's top management estimated that at a selling price of $33 per square metre, the annual sales demand would be between 50,000 - 90,000 square metres. At a selling price of $45 per square metre, the annual sales demand would be between 34,000 and 44,000 square metres. In terms of costs, at production volumes of 45,000 square metres or less per annum, machine related fixed costs would be $212,000 per annum and variable production costs would be $33 per square metre. At production volumes higher than 45,000 square metres, machine related fixed costs would increase to $308,000 and variable costs would decrease by $8 per square metre.

The production of the new carpet will have to be supervised by a production supervisor. The supervision time would be 2 hours per day of production. The supervisor supervises production of several carpet products and the salary attributable to supervise the production of FeatherTouch would amount to $1,250 per month.

The production of FeatherTouch will have to be undertaken in a division of the factory which is presently rented out for an amount of $3,450 per fortnight.

Required -

a) Calculate break-even point in square metres for FeatherTouch at the two price points mentioned in the case study.

b) Calculate the operating profit / loss and margin of safety as a percentage of sales volume at both the maximum and minimum sales volume for the two price points mentioned in the case study.

c) Determine the selling price at which the company must sell FeatherTouch carpet. Beyond what sales volume would Deluxe Carpets Ltd prefer to sell at $33 per square metre. Show necessary calculations.